Capital options are tight for cannabis companies, but cash is still available

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Cannabis companies looking for a cash injection are likely to have a tougher time in the coming months than in years past as the investor pool shrinks and funding options have narrowed, multiple experts told Reuters. attendees at a financial forum this week in Las Vegas.

During Cannavest at MJBizCon this week, a number of finance professionals agreed that money is becoming more expensive and harder to come by for players in the marijuana business, but stressed that “capital is there for stronger operators,” as Valay Shah of C3 Industries told.

But, noted Shah, “It’s really difficult right now. It’s hard to find new avenues” to actually get capital investment, due to several factors ranging from the overall economy to the low returns on investment that many backers have experienced over the past few years as marijuana stocks have gone through a long slump.

“New sources of capital are coming into the space, but the cloud of that silver lining is capital is also leaving the space,” said John Lykouretzos, CEO of Focus Growth Asset Management, who added that more “banks are starting to kick tires” in some parts of the industry.

But many financing options that exist tend to come with double-digit interest rates, warned Joe Lustberg, managing partner of Upwise Capital.

Lustberg said even the biggest multistate operators are taking capital with interest rates of 12 to 15 percent.

“When operators come to us and say 12% is too expensive, we move on,” Lustberg said, of potential investments his company is considering. “There is a cost to being a cannabis operator. Until SAFE Banking passes and federal legalization arrives, the cost will be that for a while.

Several panelists also advised against delaying tax payments as a way to fund operations, a strategy employed by some MSOs.

“You see that all MSOs now have huge debts and debts to the IRS, and the reason for that is that the IRS is the cheapest lender in the market,” Lustberg said, referring to a September Green Market Report article.

David Kirchenbaum, adviser at Meadeco, said this type of approach is not sustainable.

“I’ve dealt with a number of clients who try to arbitrate with Uncle Sam over their tax payments,” Kirchenbaum said. “It turns out to be a losing strategy in these cases, where they basically use that aspect of their funding to actually fund themselves. They wake up with a big bill, then possibly audits, and we have to turn to (lawyers) to resolve the situation.

Instead, what works best for cannabis businesses is getting loans by putting up real estate as collateral, several experts agreed.

“Real estate is probably the biggest pool of loan capital available,” said Peter Sack, managing director of Chicago Atlantic Real Estate Finance, adding that it’s the easiest way for many cannabis operators to qualify for business loans.

President Joe Biden’s efforts to legalize marijuana has also sparked renewed investor interest in the space, said Mina Mishrikey of Merida Capital Partners.

Several experts have publicly suggested that the Biden administration will push for a decision on rescheduling or de-scheduling cannabis before the 2024 election, which could lead to a seismic shift in the industry landscape over the next couple of years. .

“With Biden’s announcement a few weeks ago … we’re getting a lot more investment from institutional investors, who are like, ‘We want to get in before the capital flows into the space,’” Mishrikey said.

“At some point it’s going to get so easy,” Mishrikey said of renewed investor interest and a possible financial rebound from the entire cannabis industry. “You probably want to invest now and sell there when it’s so easy.”

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